Mar 17, 2013

ASEAN - What Fracking Means for Southeast Asia

Despite the rhetoric, Southeast Asian governments have been slow to tap
their oil reserves. Fracking could make progress even slower.

Oil and gas have long held the
promise of untold riches for Southeast Asian countries. Yet, success in the
region has been mixed: Brunei has flourished and Malaysia has seen steady
progress, but Burma, Cambodia, the Philippines, Vietnam and East Timor have
struggled to exploit their reserves.

Negotiations with oil companies
and powerful neighbors are already tough as it is. However, the advent of
hydraulic fracturing (a.k.a. fracking) will make this process even more
difficult, especially when it comes to developing reserves in the South China
Sea, the Gulf of Thailand, the Timor Sea and the Andaman Sea.

The term "fracking"
refers to the practice of making fractures in rocks and rock formations by
injecting various fluids into cracks to force them to further open. The bigger
fissures permit added oil and gas to gush out of the formation and into the
wellbore, where it can then be extracted. This innovative technique for tapping
reserves has revolutionized the oil and gas industry. To be sure, many harbor
deep concerns for the damage it can cause to the environment. Nonetheless, its
ability to extend the life of existing oil fields has changed the industry’s
outlook.

The use of fracking is most
suitable for mature energy producers with established markets, developed oil
fields and infrastructure already in place. Countries such as the United
States, Australia, Canada, and in Europe and Central Asia will benefit most
from this innovative method. For example, disused oil refineries on the U.S.
East Coast are being reopened to accommodate producers whose fields were once
thought spent.

Alongside extending the life of
existing oil fields, fracking has helped to substantially lower oil prices.
According to a report by PricewaterhouseCoopers, fracking could keep oil prices
up to 40 percent lower than the levels they were previously expected to reach
by 2035.

This means crude could be valued
at less than U.S. $90 per barrel, compared with the current price of about U.S.
$100 a barrel and the peak oil price of U.S. $145 per barrel that producers
were earning in 2008 amid dwindling supplies.

For the last ten years, Cambodia
and Thailand have failed to reach a production sharing agreement over reserves
held in overlapping claims. Likewise, the future of agreements East Timor has
forged with Australia is uncertain.

Meanwhile, an agreement on
production sharing in the South China Sea is as elusive as the much vaunted
Code of Conduct for dispute resolution. China, the Philippines, Vietnam,
Malaysia, Brunei and Taiwan all have competing claims.

Gunboat diplomacy has dominated
regional politics in the South China Sea and is particularly disheartening for
the Philippines and Vietnam. Their claims surrounding the hotly contested
Paracel and Spratly islands are particularly convincing. These island chains
are believed to contain vast reserves of natural resources, including oil.

Conservatively, Cambodia has an
estimated 400 million barrels within its jurisdiction. Prime Minister Hun Sen,
who loathes criticism of his government’s handling of the issue, has promised
Khmers that oil would flow and standards of living would rise by 2012. To date,
however, nothing has been produced.

Greenwood says that family elites
involved with running many of these countries may have glimpsed a rare
opportunity to pursue policies that would enrich themselves at the expense of
their respective countries.

“For most of the countries the
problems of developing an oil and gas sector are technical and legal,”
Greenwood said. “None of those above have the resources to develop their
usually offshore oil and gas sectors without foreign investment and skills.”

He added, “In the case of
Cambodia, Vietnam and the Philippines, competing territorial claims either with
neighbors or with China also hamper development as oil/gas companies cannot
justify the massive investment involved unless there is legal certainty over
ownership and contractual obligations.”

In short, these countries are
becoming much less attractive as potential sources of oil given the diminished
financial returns and improved oil and gas recovery rates from fracking,
coupled with the political risks of doing business in these countries.

East Timor has its own issues, in
particular its sometimes prickly relations with Canberra and the Treaty on
Certain Maritime Arrangements in the Timor Sea, which was supposed to guarantee
the revenue split between Australia and East Timor for the next 50 years.

Recently an agreement between
East Timor and Australia expired and now Dili must decide whether to construct
a liquefied natural gas (LNG) processing plant with operator Woodside
Petroleum. Such a plant is necessary to develop the Greater Sunrise field. Dili
wants to build the plant on East Timorese soil, but Woodside insists this is
neither economical nor technically advisable. It wants to construct the plant
on a floating pontoon.

Nevertheless, some analysts are
more optimistic about East Timor’s prospects.

Charles Scheiner of La'o Hamutuk,
the East Timor Institute for Development Monitoring and Analysis, explained
that, on one hand, fracking has capped the price of oil and made these fields
less lucrative. Yet, he also noted that the Greater Sunrise field was
considered commercially viable in 2003 when oil was trading for around U.S. $30
per barrel.

Scheiner added that East Timor is
“not nearly as difficult as many other places where oil companies go to make
money,” such as Nigeria, Saudi Arabia, Iraq and Iran.

“Phillips Petroleum, Woodside and
many other companies began exploring in TL's (East Timor’s) part of the Timor
Sea in the early 1990s, under contracts with an illegal occupier in a war
zone,” he said, referring to Indonesia’s occupation of East Timor from 1975 to
1999. He said, “They take political risk – and sometimes violate the law – to
reap profits. Timor-Leste today is a piece of cake in comparison with then.”

Scheiner has a point, but
fracking has enabled oil companies to reopen old sites and put equipment to
work that has lain dormant for years – in their own backyards where the return
on investment is much greater. Thanks to fracking, the U.S. is expected to
eventually be self-sufficient and could become the world’s largest oil and gas producer
within the next five years.

This game changer will
effectively leave countries like Cambodia, East Timor, Vietnam, the Philippines
and perhaps even Burma back where they were five to ten years ago. Political
rhetoric in Southeast Asia during that time promised much from the oil
industry. To date, however, it has delivered little.

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